Real estate investments have the potential to generate a considerable amount of wealth but only when done right. Over the past decade, real estate investments had grown and helped to generate wealth for countless investors. For this reason, most people just into real estate deals without enquiry in the hopes of getting rich fast but that s not always the case.

While there are plenty of available opportunities in rea estate, it is important to understand all the types of real estate investments before you put in any cash. To be a shrewd investor, you have to start with understanding how real estate investment works and what to expect when you purchase any kind of real estate property.

Here is what you need to ask before you venture into real estate.

What makes a real estate property attractive?

The answer is pretty obvious to most people, money. Money is the number one thing that makes real estate property attractive to investors, and it is the reason why some of them do not have successful real estate businesses. If you want to success in this area, you need to learn and understand everything about real estate so you can understand what success really looks like.

Do you have enough time/expertise to actively invest in real estate?

Real estate requires either active or passive investment.  There are major differences between the two, and most investors have a clear inclination of one over the other. You need to figure out where your preference lies before it is too late and you make the wrong investments. If you have time on your hands, yours should consider an active investment so you can be more hands on with the property.  

What is the investment timeline?

The investment horizon/timeline is important for any real estate investor.  Will liquidity be prime for you in the future? You have to know when and if you will need liquidity and what kind of investment will support those particular needs.

What are your potential tax benefits?

The good thing about real estate is that both passive and active investments have the potential to give you tax advantages. The exact tax benefits you get will depend of the type of real estate investment.

For instance, when you make active real estate investments, you can defer capital gain taxes on your initial investments indefinitely trough the 1031 exchange while passive investors can qualify for up to 20% tax reduction thanks to the Job Act and Tax Cut.

How does real estate investment affect your portfolio?

One of the many benefits of real estate investments is the ability to diversify your portfolio. Making a real estate investment in private or public market will determine its power to diversify your portfolio. Keep in mind that not all portfolios diversification will be deemed as equal. This is why you have to understand the addition of real estate investment will impact the risk and earning potential in your situation.

Final word

You should choose the real estate investment type carefully depending on your desired return, risk tolerance, liquidity needs and investment. This ensures you make a safe real estate investment that will earn you major profits in the future.